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Invoice Financing

Invoice financing is a financial arrangement where UK businesses can obtain immediate funds by leveraging their unpaid customer invoices. It is a form of working capital finance that allows companies to access a portion of the value of their outstanding invoices before the customers have actually paid.

There are two main types of invoice financing: invoice factoring and invoice discounting:

Invoice Factoring:

  • In this arrangement, a business sells its outstanding invoices to a third-party finance provider, known as a factor
  • The factor typically advances a percentage of the invoice value, usually around 80- 90%, upfront to the business
  • The factor takes over the responsibility of collecting payment from the customers and manages the sales ledger
  • Once the customer pays the invoice, the factor releases the remaining portion of the invoice value, minus a small fee or discount (known as the factor's service charge).

Invoice Discounting:

  • With invoice discounting, a business retains control over its sales ledger and maintains its relationship with customers
  • The business borrows money against its unpaid invoices from a finance provider, usually a bank or specialised lender
  • The lender typically advances a percentage of the invoice value, often up to 80-85%
  • The business is responsible for collecting payment from the customers and managing the sales ledger
  • When the customer pays the invoice, the business repays the borrowed amount along with the lender's fees and charges.

To qualify for invoice financing in the UK, businesses generally need to meet certain criteria:

  • They should have a minimum annual turnover (often around £50,000 to £100,000)
  • Their customers should be other businesses (B2B) rather than consumers (B2C)
  • The invoices should be due within a specified period, typically 30 to 90 days.
  • The business should have a reliable credit control process and creditworthy customers.

To go about obtaining invoice financing in the UK, businesses can follow these steps:

  1. Research and identify reputable invoice finance providers or lenders that offer suitable services for their specific needs
  2. Contact the chosen finance providers and discuss their requirements, terms, and fees
  3. Complete an application process, which may involve submitting financial information, business documents, and details of outstanding invoices
  4. The finance provider will assess the application, including the creditworthiness of the business and its customers
  5. If approved, the business and finance provider will enter into a financing agreement, outlining the terms and conditions, funding limits, fees, and repayment terms
  6. Once the agreement is in place, the business can start submitting eligible invoices for financing, typically through an online platform provided by the finance provider
  7. Upon invoice verification, the finance provider disburses the agreed percentage of the invoice value to the business
  8. The business then continues to pursue payment from its customers as usual
  9. When the customer pays the invoice, the business repays the finance provider the advanced amount plus fees or discounts
  10.  The finance provider releases the remaining portion of the invoice value, minus their charges, to the business.

It's important for businesses to carefully review the terms, fees, and reputation of invoice finance providers to ensure they choose a reliable and suitable partner for their financing needs. The most reputable ones can be found here. Consulting with financial advisors or seeking professional guidance can also be beneficial during the process, the LCCI offer the possibility to speak to one of our member experts.